The petrol-diesel conundrum

Barely a year ago, the difference in the price of a litre of petrol and diesel was at an all time high (Rs. 27.19) in favour of the latter.

Following the government’s decision to decontrol the prices of petrol, its cost had gone up by over 33% between July 2010 and 2012 (see graph). It however remained indecisive on diesel, which meant prices barely nudged 3%. This resulted in an almost immediate and dramatic impact on sales of cars and SUVs around the country. Entry level small car sales slipped in favour of bigger versions that had diesel options and SUVs. From barely 32% in July 2010, share of diesel vehicles in overall automobile sales in the country rose to over 50% by the first half of 2013.

Since then however, the cycle has been reversed. In less than one year, diesel prices have gone up by over 20% since July 2012 largely due to a phased price decontrol. Prices of petrol on the other hand have gone down by almost 8% in the same period as a result of the fall in international crude prices. The cost differential between the two fuels, now at Rs. 13.4 per litre, is at its lowest level in 3 years.

The impact of this on the ownership matrix of a diesel and petrol car spread over 5 years is dramatic. At July 2012 prices, you would have saved nearly Rs. 80,000 by opting for a diesel car if you drive on an average 60 kilometres a day or 22,000 kilometres a year. Today, that benefit has been cut to a meagre Rs. 2,500, which means the 10% higher maintenance cost of a diesel engine would make petrol cars a more attractive bet.

What does it mean for a prospective consumer? Should the market now ditch diesel for petrol?

Not entirely. A comparison between the respective running cost of a comparable petrol and diesel car would suggest that for somebody who travels over 70 kilometres a day, like in big cities and metros, diesel still makes more sense. However, it does not quite hold true in small tier II and III towns where the distances as also the affordability of cars is relatively less.

By nature, a diesel car is 20% more fuel efficient than a petrol car, and alongwith the cheaper fuel helps negate its higher cost (see table). At current prices, somebody who drives 60 kilometres a day will be able to break even save some money in a diesel car in 5 years. If you drive less per day, say 40 kilometres on an average, the break even time balloons to seven and a half years. Some other factors like cost of maintenance that tends to be higher on diesel vehicles also load the dice in favour of petrol cars.

The reversal in the pricing of the two fuels and its corresponding impact on the ownership matrix is finally being felt in the market. After a two year bull run, sale of diesel cars are at the cusp of a negative spiral while that of petrol cars is witnessing an uptick in demand.

There is speculation that prices of diesel are likely to go up further as the government undertakes its final few steps at a de-control. At the same time, there is a school of thought that the international crude oil prices is now at the low end of its cycle and will start going up soon. In effect, petrol will become dearer henceforth. The uncertainty over prices renders any such calculations that bets on the price differential between the two fuels to stay by and large at the same level, useless.

The best solution is…trust your instinct and follow your hunch. Nobody is a pundit in this game.

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